Bad predictions: activity managed equity funds

An article about diversity in ETFs includes this figure about the prediction abilities of those who pick stocks:

A study by S&P Dow Jones Indices found that from 2006 to mid-2016, 87 percent of all actively managed U.S. equity funds underperformed the market.

In other words: not good. This is plenty of other evidence about this; see the work of Phillip Tetlock. Hence, the rise of ETFs.

One thing that this article on ETF does not address: if more business has moved to different financial instruments, what has happened to all of those stock pickers and hedge fund managers?

A college degree leads to more geographic mobility

Americans with a college degree are more likely to leave where they grew up and end up in metropolitan regions:

Today, people with a college degree are more likely than they used to be to move to metropolitan regions with good jobs and other people like them, and this means both that those regions do better over time and that the return on that education is even greater. Almost half of college graduates move out of their birth states by age 30, according to Moretti. Only 27 percent of high school graduates do. As booming cities draw in new college-educated workers, employers seeking these workers follow, and cities continue to gain strength like magnets. This improves the prospects of everyone in the region, including those without college degrees. The working-class strongholds that once prospered without college-educated workers, on the other hand, are doing worse and worse, as computers and robots replace the workers whose jobs haven’t been sent overseas, and, as a result, an oversupply of labor brings down wages for everyone still there.

It’s not just that a college degree leads to higher earnings or more opportunities; it is also that people with college degrees tend to cluster in certain locations. Even in a world where technology could theoretically allow workers to be far away from their workplaces, the clustering in desirable cities of employers, cultural scenes, and places to live with a high quality of life is linked to education levels.

Another side effect of this clustering is that cities tend to have diverse and vibrant economies while smaller communities simply can’t access multiple options. Thus, even if a smaller community has a single thriving industry, this may not work well:

Focusing on one type of industry could be a successful strategy; Warsaw, Indiana, a relatively small town in the northern part of the state, is the orthopedic capital of America, with dozens of orthopedic device companies small and large located there and a bustling economy as a result. Elkhart, Indiana is the epicenter of the recreational vehicle industry, and manufacturers and suppliers are located there, creating good jobs when the economy is doing well. Cities and towns may be able to convince a cluster of a certain type of companies to locate there, and reverse their decline. “Every place has to look at its comparative advantage, and find a niche,” Ross DeVol, the chief research officer at the Milken Institute, told me.

Having lived near Elkhart during the financial crisis, such a strategy can look good in boom times but be disastrous in down times.

Looking toward the future, are there any particular industries or sectors that would be willing to spread out geographically in order to build stronger American communities? This might limit their profits or make it difficult to attract certain employees but could it be worthwhile to invest in smaller communities in the long run (either for the communities or also for a competitive advantage)? Even sectors like health care are finding it difficult to maintain facilities in small towns because of the advantages that consolidation and economies of scale offer.

Are we already to the point where people live in rural areas because (1) they are “stuck” there or (2) because they are already well-off and have the resources or option to live there?

Trying to split Naperville’s downtown streetscape improvement costs

Downtowns need regular upkeep and maintenance but paying for streetscape improvements can be a tricky matter:

In an estimated $15 million project that’s expected to take six years once it begins, the city plans to upgrade sidewalks, install new benches and street furniture and enhance street corners throughout its commercial core…

City staff members are proposing the work be paid for over 15 years, with the city contributing half and downtown property owners the other half.

They say it’s a fair cost distribution because a strong downtown improves the city as a whole…

Problem is, those same downtown property owners who could be asked to foot the bill for sidewalks and benches also are still paying off the Van Buren Avenue parking garage — and will be until 2021, 20 years after it was constructed. They’re also paying for ongoing downtown maintenance and marketing through a separate special tax that’s renewed every five years.

As is suggested in the article by local leaders, perhaps this is simply the price of doing business in a popular suburban downtown: you chip in to help make the downtown better. This sort of public-private partnership can work well when there is a vibrant business scene. But, I could also imagine that these added costs make it more difficult for certain kinds of businesses to participate.

It would also be interesting to know how these streetscape improvements compare with efforts of others – whether municipalities or shopping centers – to improve their appearance and amenities. One way to view retail competition is as an arms race: who can create and foster the most vibrant scene? Who has the mix of stores, restaurants, recreational opportunities, parking, weather, and events that would lead consumers to go there rather than somewhere else? Not making such proactive improvements, even though they may be costly, could lead to falling behind.

Can you plan suburban growth around an Amazon distribution center?

Thanks to state tax breaks, Amazon will soon begin construction on a new distribution center in northeast Aurora. The new facility is said to bring 1,000+ jobs. The latest newsletter from the City of Warrenville discusses the new facility. The facility is located near the border with Warrenville and the city thinks this will be a good for Warrenville:

warrenvilletifamazon

Can an Amazon facility be an economic boon for a suburb, particularly in a portion of the community that is underdeveloped? At the least, the 1,000+ workers will have to live somewhere. Could there be certain facilities that pop up to serve the workers – fast food places? Gas stations? Dry cleaners? Tattoo parlors (wait, Warrenville has enough of those)? Adding students to the school system?

I’m sure the city is either working on estimates of this and it would be worth sharing with the public. Connecting the dots between a warehouse/distribution facility and other community amenities is not obvious and what is Warrenville willing to do to capitalize on this opportunity?

What if the best single display of America is Walmart?

In making several trips to Walmart in advance of Christmas, I found myself marveling several times at the store. Here are some reasons why this retail giant may be the best single illustration of America today:

  1. Consumerism rules. Each Walmart has so much stuff, from groceries to auto parts to Christmas trees to dinnerware. And Americans like this stuff even more if it is reasonably priced.
  2. On the flip side of consumerism, how can one company coordinate all that manufacturing and shipping to get items to each store? Walmart’s rise is due in part to their logistical abilities.
  3. Walmart is a great place to find stuff with which to go overboard for whatever holiday is coming up. Americans love Christmas, Halloween, Fourth of July, Easter…
  4. Walmarts generally require customers to drive there, often due to their locations in suburban or rural areas, the need for a good chunk of land, and helping shoppers to transport all the stuff they buy.
  5. Because of the prices and locations, Walmarts tend to attract a diverse set of shoppers.
  6. The company does not let workers unionize.
  7. The Sam Walton story is not exactly rags to riches but it does suggest that a hard worker with some new ideas can make something big of himself.
  8. Everyone has to eat and Walmart is the largest grocery chain in the United States.
  9. It is an iconic American brand though it hasn’t exactly caught on around the world like others (such as Coca Cola, McDonald’s, Nike).
  10. Everyone seems to have an opinion about its merits or flaws. Still, according to the company, “Every week more than 60 percent of Americans shop at Walmart.”
  11. It is convenient and ubiquitous for many: “About 90 percent of Americans live within 15 minutes of a Walmart store.
  12. The company’s size is hard to fathom:

    “And Wal-Mart’s heft is not just financial, it’s physical too. Its 4,600+ U.S. stores occupied almost 700 million square feet. That’s roughly enough space for 11,800 football fields. That means the entire population of Buffalo, New York, could suit up, split into teams and play football against each other simultaneously in Wal-Marts across the country.

    The company’s total revenue for fiscal 2016 was $482.1 billion. That’s enough to buy a gallon of milk every day for every person in Brazil for two years, based on the $2.89 price per gallon at the North Bergen, New Jersey, Wal-Mart.

    Wal-Mart’s costs and expenses hit $458 billion for the year, which is bigger than the budgets of all but four U.S. government departments. Here’s what the rankings would be:

    1) Health and Human Services
    2) Social Security
    3) Treasury
    4) Defense
    5) Wal-Mart.”

For better or worse, is Walmart America?

Cities using ride-sharing services to supplement mass transit

Several pilot programs in American cities take advantage of the rise of ride-sharing companies:

Transit agencies, perennially strapped for cash, have embraced these pilot programs as a way to save money and, potentially, provide better service. Outside Tampa, for example, the East Lake Connector bus cost the Pinellas Suncoast Transit Authority about $16 per person per ride. Riders paid $2.25 each. That route has since been discontinued. In its place, starting this month, riders will pay $1 for an Uber, Lyft, or cab ride from anywhere in the county to the nearest bus stop. The transit agency will achieve the low fare by providing a $5-a-head discount.

And here is some criticism for such efforts:

There are serious concerns with such programs: For starters, the savings are in part derived from trading public-sector employees like bus operators for low-wage stringers like Uber drivers. For the most part, though, the partnerships have made bad service a little better. In Pinellas, for example, the program emerged in response to a 2014 referendum in which local voters declined to adopt a 1 cent sales tax in support of transit.

But now that chain of cause and effect is being reversed. The rise of ride-hailing companies is increasingly viewed not as a fix for bad service but as its justification. It is invoked, as you might expect, in bad faith by conservatives who have advocated against public investment for decades. But even pro-transit politicians and officials have begun to see ride-hailing services as an acceptable substitute for public transit. As a result, cities across the country are making important decisions about transportation that treat 10-year-old companies as fixed variables for the decades to come…

We’ve known for a while that Uber is unprecedentedly unprofitable, its $60 billion-plus valuation notwithstanding. But as we begin to make policy decisions based on it and its competitors’ impact, we have to recognize that this state of affairs can’t last. It is not just the taxi cartel that makes conventional cab rides cost more than Uber rides. It’s the patience and optimism of Silicon Valley investors. Maybe Uber will continue its shift into shared rides, which (as a prior generation of transportation operators learned 150 years ago) are more profitable. Or robot cars will eliminate driver jobs, dropping the marginal cost of providing rides (though adding billions in capital expenditures). But in any case, whether it achieves its desired market share or not, the company will have to start raising prices.

This criticism makes sense: mass transit is all about economies of scale and having large numbers of people following more fixed routes. Failing to build infrastructure now means there will be reduced mass transit options in the future.

But, I think there may be a larger issue that undercuts this criticism: what if large numbers of Americans don’t want to use mass transit, either when given other opportunities or they have enough resources on their own to get where they want or they don’t want to pay for it through taxes and municipal funds? Even with plateauing driving in recent years, this doesn’t necessarily mean Americans want to sacrifice their mobility or personal space to use mass transit more. If this is true, perhaps driverless cars are the true answer for individualized mass transit – not ride-sharing – as they would offer personal space and mobility but without the hassle of driving oneself. Of course, this could also destroy mass transit as we currently know it…

Investing in foreclosed homes goes public

Here is a new business model: buy a lot of foreclosed homes after a housing bubble bursts, plan to rent out many of the properties, and watch the money flow in.

Though Blackstone is unlikely to sell much or even any of its stake in an IPO, the stock market debut will test investors’ interest in the idea that the rental-home business can be institutionalized as apartments, shopping centers and office towers were before.

Blackstone and others investors believed that the housing collapse presented a rare opportunity to acquire homes for less than it cost to build them. Millions of foreclosures created a market large enough to justify investing in large systems to manage and maintain sprawling portfolios of rental homes…

To generate the revenue growth that shareholders will demand, they must pace rent hikes to avoid spooking tenants into becoming home buyers themselves. And now that foreclosure rates have returned to normal levels and prices have rebounded, they could find it difficult to add new houses at attractive prices.

They also must convince investors that huge home-rental companies are viable long-term businesses, not just massive portfolios of properties that need to be sold off.

I imagine there will be some particular parties (not just investors) interested in how this works out:

  1. Nearby residents. What happens if this leads to significantly more renters of homes in certain places? Americans tend to view renters more negatively than homeowners – though this might change in the future if the country shifts to fewer homeowners. How well will Blackstone do with having quality renters and following up with issues?
  2. Communities. Having renters is probably preferable to having vacant homes. But, they might have similar concerns as nearby residents as well as other interests in how Blackstone uses the properties.
  3. Advocates for affordable housing. There was some concern a few years ago that having large firms like this purchase cheap homes could limit lower priced housing. The lower end of the housing market could use more stock but investors may need to pursue higher rents in order to generate profits.
  4. Renters and homebuyers. What kind of rents will Blackstone charge? Will they eventually sell these properties and at what price? What kind of landlords will they be.

Additionally, I wonder what would happen if this does not prove to be a viable business plan. Are there others who would be interested in purchasing these properties? What if foreclosure proceedings begin with an institutional investor?